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Breaking up NBN Co needs immediate action

The Vertigan panel's final report may have drawn much criticism, but we need to get off the fence and choose a policy direction nonetheless.

The Vertigan Panel has recommended a path towards an infrastructure competition model for Australia’s telecommunications market. They have met a challenge to re-cast the debate about Australia’s broadband policy by recommending the government “disaggregate NBN Co along the lines of its underlying networks where each of the satellite, fixed wireless, Hybrid Fibre Coax (HFC) and Fibre-to-the-Something (FTTx) networks would serve as the basis for a competing entity”.

However, the government and the wider telecommunications industry have not welcomed this news. The minister has stated “now is not the time” and “breaking up NBN Co would distract its management and delay the provision of high speed broadband to all Australians”.

The Competitive Carriers Coalition has suggested the Vertigan recommendations should be “binned” and “were nothing more than rehashed, discredited theoretical arguments”.

To date few people have come out in support of the Vertigan recommendations. So will that be the end of the matter? Will its final report just end up sitting on the shelf?

After almost five years as chief technology officer at NBN Co, mostly under the previous Fibre-to-the-Premise (FTTP) policy initiative, it may seem heretical for me to recommend deep consideration of the Vertigan recommendations. But my interest is not so much in ideologies of state owned enterprises versus private sector investment in telecommunications.

My interest is in having a sustainable model for the long term that can improve Australia’s telecommunications infrastructure. We are currently a “Broadband Backwater” on the international stage. The most recent benchmark study by Akamai has Australia ranked 41st for average broadband download speeds.

The advertisements comparing Australia to Romania and Slovakia are correct – we are behind most of the rest of the developed world, and a growing part of the developing world, when it comes to having quality broadband infrastructure.

To fix this bad and increasingly relevant situation given our declining terms of trade, Australia’s telecommunications policy must be framed around investment in more optical fibre infrastructure. The debate over different FTTx technologies all have a common thread – more fibre must be installed closer to the end user. This is the case for fixed, mobile, Wi-Fi, corporate or any other network technology – new mobile cell sites, access points, cabinets, distribution points are always being connected to fibre.

The previous government’s FTTP policy was a bold policy born in the depths of the Global Financial Crisis. It sought to take Australia from the back of the pack to be a world leader over a period of 10 years. It has, despite the well documented rollout challenges, changed the industry landscape. The deal between Telstra and NBN Co in particular, along with the fibre network rollout, would have created a genuine broadband utility company, NBN Co. Other markets, such as Singapore and New Zealand are well down this path of having fibre broadband as a regulated utility service.

It is likely the fibre infrastructure, over time, would have been deployed beyond homes and offices to mobile base stations, public WiFi networks and other developing smart infrastructure (electricity, roads, street lighting etc). It’s still a very attractive model and I for one would not argue against it. But it is not the policy of the government of the day.

Same model, old technology

Since the election in September 2013, the previous government’s monopoly fibre utility company, NBN Co, has been transforming itself to meet the new government’s NBN Multi Technology Mix (MTM) policy. This policy calls for deployment of Fibre-to-the-Node (FTTN) on Telstra’s’ copper network and takeovers of the existing Telstra and Optus HFC networks to reduce cost and speed up the NBN rollout.

These are both noble objectives – but they are not easy ones by any means. Deals have to be renegotiated with Telstra and Optus, old technologies have to be re-engineered and complex IT systems have to be extended to cover multiple operating models (as each technology will have its unique operating environment). It will take time and progress will not necessarily meet the expectations of stakeholders.

But, when achieved, we will still have the key aspects of Labor’s broadband monopoly utility model but with a range of older re-engineered technologies. More fibre will have been deployed but only approximately one quarter of Australia’s premises will have FTTP. We will have a utility monopoly structure but only part of the future fibre network deployed.

Sustainable fibre deployment

So the next big question for all of us wanting Australia to improve its ranking in the global digital economy will be how do we deploy more fibre on an on-going sustainable basis. This need not be FTTP, but it may be fibre to the distribution point just outside the property boundary or fibre to the public Wi-Fi hotspot or small mobile cell site.

The broadband monopoly utility company will find this difficult – it will be constrained financially by its need to meet its lower cost objectives and will not see a business case to invest in more fibre without being able to charge higher prices. It may be distracted by smaller companies looking to “cherry-pick” lucrative areas such as the current action around fibre-to-the-building (FTTB). Ironically, Australians in these locations will gain the benefits of competition while NBN Co strives to maintain its monopoly.

Some wealthy suburbs may be able to pay upfront fees to receive “fibre on demand” services but these fees will, as seen in overseas markets, be high and out of the reach of most Australians. Where it does retain its monopoly, which will be the majority of Australia, it will, like most monopoly infrastructure companies, invest only when it can charge higher prices or receive government funding. A case in point is the recent upgrades to poles and wires of Australia’s electricity assets.

So on the current path, after NBN Co has re-engineered itself to be a multi-technology monopoly utility, we will have a market structure that fails to encourage investment in the necessary optical fibre infrastructure. Other countries, with sustainable public or private investment models in fibre infrastructure will continue to lead the way.

This brings me back to the Vertigan Panel recommendations. The current Coalition Government has stated it is considering the report in more detail, despite its initial “too hard” response. It should consider the panel’s recommendations deeply and thoroughly.

Climbing back up the broadband rankings

The Government’s over-arching objective should be to set a goal for Australia to be one of the leading countries in the international broadband rankings. One option would be to commit to a full fibre rollout over time (with FTTN & HFC as short term transition steps although they may, in my opinion, be more trouble for a utility company like NBN Co than they are worth) and create a viable “all-fibre” broadband monopoly utility company that achieves obtains a regulated return on its long term investment. Depending on the timing and funding commitment Australia may still be able to catch up to the middle or front of the international broadband pack.

Or, if this is not possible for ideological, financial or other reasons then it needs to adopt the Vertigan Panel recommendations immediately. It will not be an option to wait for the NBN MTM to be built and then decide. Telecommunications companies are complicated beasts – separating them after they are built is costly and in some cases impossible. Debates over functional or structural separation of Telstra always stumbled on the cost, particularly in respect of IT systems. British Telecom in the end could not be structurally separated and opted for functional separation at a high cost to its shareholders. Telecom New Zealand is now two companies, Chorus and Spark, however, the costs and market impacts are still being felt with Chorus’s share price down by approximately 40 per cent since the split.

If NBN Co is given instructions now, via its Statement of Expectations, to prepare for an eventual split, the costs and impacts will be minimised. The extra costs to prepare for this eventuality now are insignificant compared to the costs to do it retrospectively after the legacy assets are integrated into NBN Co.

I have no doubt a competitive infrastructure model will result in more fibre being deployed over the medium to long term than relying on a multi technology monopoly. It will also be more efficient and innovative. New entrants will relish the opportunity to compete with incumbent carriers. Perhaps this is why the Competitive Carriers Coalition is not too happy with this model – it means they will be open to more competition from these new entrants. Telstra will lose its dominance of fixed telecommunications and will need to choose which technology it wants to back – HFC, FTTx or perhaps just mobile.

A competitive cross-subsidy scheme

Government will need to work out a cross-subsidy scheme for regional Australia to ensure it is not left behind. But this cross-subsidy scheme could itself be competitive with new technology asset owners bidding for the cross-subsidy in geographic regions using reverse auctions. Previous attempts at this have failed in Australia because Telstra held all the technology cards and no other carrier was able to bring scale efficiencies to compete equally in regional areas.

Furthermore, the infrastructure competition model is viable in a vast country like Australia. One of our closest Commonwealth cousins, Canada, has only ever known this type of telecommunications market. With similar population densities and distributions as Australia it has managed competition between cable, telco and mobile networks. Canada ranks 19th in Akamai’s latest international benchmarking of average connection speeds despite its geographical challenges (compared to Australia’s 41st ranking). It even has a private sector company, Xplornet, investing in fixed wireless and satellite broadband services for remote areas using similar technologies to NBN Co with minimal government subsidies.

Reform fatigue

Australia’s telecommunications market has been in a continual state of reform for approximately 25 years. The policy mistakes are well documented. There is certainly reform fatigue throughout the industry. Hence the call to “just get on with it”. But, in my view, this continual state of reform is due to the lack of implementing a long term sustainable model that drives investment in fibre infrastructure. Only two exist – a broadband all-fibre monopoly utility model or a pro-competitive infrastructure model.

Australia has been in a no-man’s land policy gap between these models since the 1990s. A combination of partisan political point scoring and short-sighted policy mistakes have led to “middle of the road” policies with “middle of the road” outcomes. Regulation of the Telstra multi technology near monopoly (copper and HFC) could not create investment incentives in the mid-2000s. Government tenders to entice Telstra investment failed.

For the sake of a better broadband future, Australia needs to get off the fence and choose its policy direction – the Vertigan Panel has outlined a path towards one of these alternatives. The Government needs to consider it closely, and if it’s rejected, must outline a model and commitment to increasing fibre investment by its broadband utility company – NBN Co – over the medium to long term.

If Australia continues to sit on the telecommunications policy fence we will uncomfortably see our international broadband rankings decline even further.

Gary McLaren has over 25 years experience in the telecommunications sector. He was Chief Technology Officer at NBN Co from its formation in 2009 until 2014.

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